LendingClub Corp: Don’t Be Fooled by LC Stock

Advertisement

LC - LendingClub Corp: Don’t Be Fooled by LC Stock

Source: Simon Cunningham via Flickr (Modified)

Congratulations to any investors who stuck with struggling LendingClub Corp (NYSE:LC) at least through Thursday morning. LC stock is up 11% today, and has gained more than 55% from May’s low, when the online lender announced then-CEO Renaud Laplanche would be stepping down as the Department of Justice began probing the company, and dissecting its loan-making business.

LendingClub Corp: Don't Be Fooled by LC StockThe advance over the last three months was mostly rooted in a “can’t get any worse” perspective from the market, while today’s strong move from LC was prompted by the company’s announcement that it would end an expensive program designed to secure the funding needed to make loans.

Shareholders cheered the news, which could save millions of dollars per year. The market has failed to ask a very simple question though: Can LendingClub get all the funding it needs without offering those incentives?

Tough Year for LendingClub

The news was a much-needed salve for investors who’ve watched the value of LC stock sink nearly 50% year-to-date.

The idea of peer-to-peer lending was unusual but interesting when LendingClub began operating in 2006. The premise finally became compelling enough a couple of years ago to merit a December 2014 IPO, but as is the case with too many public offerings, this one came shortly after euphoria had peaked and shortly before reality set in.

That reality for LendingClub was simply that the stock’s valuation didn’t make sense relative to the risk it posed by trying to be a bank without trying to be a bank.

It’s not an easy tightrope to walk, and another big name within the company has followed Laplanche out the door. The latest abdication? CFO Carrie Dolan is now stepping down. There’s a reason the CFO — who arguably knows more than anybody about the organization’s financial condition and outlook — is bowing out.

Is There Any Hope for LC?

The business model is simple enough. The company lends other people’s money to its borrowers, paying funders a bit less than it charges borrowers, and either collecting the difference — the spread — or securitizing those loans and selling them to investors.

Not unlike the subprime debt crisis of 2008, loan quality became a hot button; the funders weren’t entirely sure they were getting what they were paying, so to speak, hence the incentives LendingClub offered its backers earlier this year. All told, LendingClub dished out $14 million worth of incentives last quarter to sweeten the pot for the investors supplying its loan funding.

For perspective, the company generated $281 million in revenue last quarter, posting a gross profit of $103 million and a net loss of $81 million. Even in a good quarter though, net income of around $4 million seems to be the cap. Never mind the fact that it only forecasted incentive expenses of $9 million for the quarter.

And therein lies the rub. Of course, investors love the idea of lower expenses. The question is, are those incentives necessary to keep funding flowing in a market that has grown plenty suspicious of the very idea of peer-to-peer lending, and of LendingClub in particular?

Bottom Line for LC Stock

At the end of the day (like any other business), the LendingClub proposition ends up being a mathematical matter. Can the company secure enough funding at the rates it’s willing to pay backers and in light of the interest rates it has to charge borrowers? Likewise, can it justify the current price of LC stock, given those numbers to current and would-be investors?

The big gain from the stock today says the market believes the answer to both questions is “yes,” but that’s an opinion based more on hope than reality.

If LendingClub didn’t have to offer incentives last quarter, it wouldn’t have. If it didn’t have to obscure the credit quality of its loan portfolio to funders, it wouldn’t have. A new CEO and new CFO might restore some credibility to the organization, but neither can defy the laws of math and the reality of supply and demand, which are the biggest impasses at this time.

Indeed, a lack of incentives could end up doing more damage to the bottom line than good.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2016/08/lendingclub-dont-be-fooled-lc-stock/.

©2024 InvestorPlace Media, LLC